Forex traders make money when currency rates change. However, the market remains stationary most of the time; there are trends only 15% to 30% of the time. Therefore, it’s important to know when a trend is likely to develop.
The Alligator is a technical indicator that predicts when a market trend is likely to develop. It consists of three trend lines, referred to as the jaw, teeth, and lips of the alligator. When these are close together, the alligator is asleep and there are no trends. When they diverge, the alligator’s mouth is open and it starts to eat, generating a trend.
The indicator consists of three balance lines:
- The jaw – a 13 period smoothed average price moved into the future by 8 bars and shown as a blue line
- The teeth – an 8 period smoothed average price moved into the future by 5 bars and shown as a red line
- The lips – an 5 period smoothed average price moved into the future by 3 bars and shown as a red line
When the mouth is open, it’s time to start trading, and it’s time to lock in profits when the mouth closes again. Note that the Alligator does not predict which type of trend will develop; it only shows that a trend is likely to start.
Each balance line is calculated using the median price in each trading interval, which is the average of the high and low prices. The individual lines are calculated as described above.
MEDIAN = ( HIGH + LOW ) / 2
JAW = SMMA ( MEDIAN, 13, 8 )
TEETH = SMMA ( MEDIAN, 8, 5 )
LIPS = SMMA ( MEDIAN, 5, 3 )
SMMA( MEDIAN, A, B) is the smoothed moving average of the median price, where A is the smoothing period and B is the number of intervals that the line is moved into the future.